**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)** |   |                                                                                         |
|-----------------|--------|----------------------------------------------------------------------------------------------|
|            |   |                                                                                         |
| **ý**      |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the quarterly period ended March28, 2003 or**

 
| **o** |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

**For the period from           to          /**

 

**Commission file number: 000-30575**

 

**AVOCENT CORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                                                    |   | **91-2032368**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **4991  Corporate Drive  Huntsville, Alabama**                  |   | **35805**                                |
| (Address of Principal  Executive Offices)                       |   | (Zip Code)                               |
|                                                            |   |                                     |
| **256-430-4000**                                                |
| (Registrant’s Telephone  Number, Including Area Code)      |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

 

ýYes  oNo

 

                Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934, as amended).

 

ýYes  oNo

 

As of May 6, 2003, the number of outstanding shares ofthe Registrant’s Common Stock was 45,877,343

 

 

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**AVOCENT CORPORATION**

**FORM 10-Q**

**March 28, 2003**

 

**INDEX**

 
| Part I                                            | Financial Information |
|---------------------------------------------------|-----------------------|
|                                              |                  |   |
|                                              | Item 1.               | Financial Statements |
|                                              |                  |   |
|                                              |                  | Condensed  Consolidated Statements of Operations (unaudited) for the Three Months Ended  March 28, 2003 and March 29, 2002 |
|                                              |                  | Condensed  Consolidated Balance Sheets at March 28, 2003 (unaudited) and December 31,  2002 (audited) |
|                                              |                  | Condensed  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended  March 28, 2003 and March 29, 2002 |
|                                              |                  | Notes  to Condensed Consolidated Financial Statements (unaudited) |
|                                              |                  |   |
|                                              | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                              |                  |   |
|                                              | Item  3.              | Quantitative  and Qualitative Disclosures about Market Risks |
|                                              |                  |   |
|                                              | Item 4.               | Controls and  Procedures |
|                                              |                  |   |
| Part II                                           | Other Information     |
|                                              |                  |   |
|                                              | Item 1.               | Legal Proceedings |
|                                              |                  |   |
|                                              | Item 6.               | Exhibits and  Reports on Form 8-K. |
|                                              |                  |   |
| Signatures                                        |
| Sarbanes-Oxley  Act Section 302(a) Certifications |

 

2

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**PARTI —FINANCIAL INFORMATION**

 

Item 1. Financial Statements

 

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except pershare data)

#### ** **

|                                                            |   | **For the  three months ended** |   |
|-----------------------------------------------------------------|--------|---------------------------------|--------|
|                                                            |   | **March 28,  2003**             |   | **March 29,  2002** |   |
|                                                            |   | **(unaudited)**                 |   | **(unaudited)** |   |
| Net sales                                                       |   | $                               | 71,162 |   | $ | 62,103 |   |
| Cost of sales                                                   |   | 31,565                          |   | 31,840 |   |
| Gross profit                                                    |   | 39,597                          |   | 30,263 |   |
|                                                            |   |                            |   |   |   |
| Research and  development expenses                              |   | 6,812                           |   | 6,437 |   |
| Selling, general  and administrative expenses                   |   | 16,659                          |   | 19,923 |   |
| Amortization of  intangible assets                              |   | 6,156                           |   | 5,297 |   |
| Total operating  expenses                                       |   | 29,627                          |   | 31,657 |   |
|                                                            |   |                            |   |   |   |
| Income (loss)  from operations                                  |   | 9,970                           |   | (1,394 | ) |
|                                                            |   |                            |   |   |   |
| Net investment  income                                          |   | 1,226                           |   | 1,386 |   |
| Net realized  investment losses                                 |   | (87                             | )      | (75 | ) |
| Other income  (expense), net                                    |   | (305                            | )      | 53 |   |
|                                                            |   |                            |   |   |   |
| Income (loss)  before provision for (benefit from) income taxes |   | 10,804                          |   | (30 | ) |
| Provision for  (benefit from) income taxes                      |   | 2,637                           |   | (333 | ) |
|                                                            |   |                            |   |   |   |
| Net income                                                      |   | $                               | 8,167  |   | $ | 303 |   |
|                                                            |   |                            |   |   |   |
| Earnings per  share:                                            |   |                            |   |   |   |
| Basic                                                           |   | $                               | 0.18   |   | $ | 0.01 |   |
|                                                            |   |                            |   |   |   |
| Diluted                                                         |   | $                               | 0.17   |   | $ | 0.01 |   |
|                                                            |   |                            |   |   |   |
| Weighted average  shares used in computing earnings per share:  |   |                            |   |   |   |
| Basic                                                           |   | 45,413                          |   | 44,828 |   |
|                                                            |   |                            |   |   |   |
| Diluted                                                         |   | 46,691                          |   | 45,698 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands, except pershare data)

 
|                                                                                                                                                                         |   | **March 28,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                                                                         |   | **(unaudited)**     |    | **(audited)**           |   |
| **ASSETS**                                                                                                                                                                   |   |                |    |                    |   |
| Current assets:                                                                                                                                                              |   |                |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                   |   | $                   | 75,092  |                    | $      | 61,699 |   |
| Investments  maturing within one year                                                                                                                                        |   | 98,433              |    | 107,619                 |   |
| Accounts  receivable, net                                                                                                                                                    |   | 38,840              |    | 36,313                  |   |
| Income taxes  receivable                                                                                                                                                     |   | 356                 |    | 609                     |   |
| Other  receivables, net                                                                                                                                                      |   | 1,028               |    | 1,191                   |   |
| Inventories, net                                                                                                                                                             |   | 21,264              |    | 24,422                  |   |
| Other current  assets                                                                                                                                                        |   | 3,426               |    | 3,256                   |   |
| Deferred tax  assets                                                                                                                                                         |   | 5,257               |    | 5,932                   |   |
| Total current  assets                                                                                                                                                        |   | 243,696             |    | 241,041                 |   |
| Investments                                                                                                                                                                  |   | 65,316              |    | 44,849                  |   |
| Property held  for lease, net                                                                                                                                                |   | 1,673               |    | 1,723                   |   |
| Property and  equipment, net                                                                                                                                                 |   | 23,759              |    | 24,313                  |   |
| Goodwill                                                                                                                                                                     |   | 203,625             |    | 203,625                 |   |
| Other intangible  assets, net                                                                                                                                                |   | 46,485              |    | 52,601                  |   |
| Other assets                                                                                                                                                                 |   | 459                 |    | 455                     |   |
| Total assets                                                                                                                                                                 |   | $                   | 585,013 |                    | $      | 568,607 |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                               |   |                |    |                    |   |
| Current  liabilities:                                                                                                                                                        |   |                |    |                    |   |
| Accounts payable                                                                                                                                                             |   | $                   | 5,779   |                    | $      | 6,416 |   |
| Accrued wages  and commissions                                                                                                                                               |   | 5,515               |    | 7,743                   |   |
| Accrued  liabilities                                                                                                                                                         |   | 12,511              |    | 13,662                  |   |
| Income taxes  payable                                                                                                                                                        |   | 10,481              |    | 6,901                   |   |
| Total current  liabilities                                                                                                                                                   |   | 34,286              |    | 34,722                  |   |
| Deferred tax  liabilities                                                                                                                                                    |   | 14,061              |    | 16,213                  |   |
| Total  liabilities                                                                                                                                                           |   | 48,347              |    | 50,935                  |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Stockholders’  equity:                                                                                                                                                  |   |                |    |                    |   |
| Preferred stock,  $0.001 par value; 5,000 shares   authorized, no shares issued and outstanding as of March 28, 2003 and  December 31, 2002, respectively               |   | —              |    | —                  |   |
| Common stock,  $0.001 par value; 200,000 shares authorized, 45,687 and 45,210 shares issued  and outstanding as of March 28, 2003 and   December 31, 2002, respectively |   | 46                  |    | 45                      |   |
| Additional  paid-in capital                                                                                                                                                  |   | 945,240             |    | 936,288                 |   |
| Accumulated  other comprehensive income                                                                                                                                      |   | 273                 |    | 14                      |   |
| Deferred  compensation                                                                                                                                                       |   | (4,621              | )       | (6,236                  | )      |
| Accumulated  deficit                                                                                                                                                         |   | (404,272            | )       | (412,439                | )      |
| Total  stockholders’ equity                                                                                                                                             |   | 536,666             |    | 517,672                 |   |
| Total  liabilities and stockholders’ equity                                                                                                                             |   | $                   | 585,013 |                    | $      | 568,607 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                               |   | **For the  three months ended** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                               |   | **March 28,  2003**             |       | **March 29,  2002** |   |
|                                                                               |   | **(unaudited)**                 |       | **(unaudited)** |   |
| Cash flows from  operating activities:                                             |   |                            | * *   |   | * * |
| Net Income:                                                                        |   | $                               | 8,167      |   | $ | 303 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                            |       |   |   |
| Depreciation                                                                       |   | 1,356                           |       | 1,078 |   |
| Amortization of  intangible assets                                                 |   | 6,156                           |       | 5,297 |   |
| Stock-based  compensation                                                          |   | 1,615                           |       | 5,493 |   |
| Amortization of  premiums on investments                                           |   | 762                             |       | 373 |   |
| Net loss on  sales of investments                                                  |   | 87                              |       | 75 |   |
| Income tax  benefit from exercise of stock options                                 |   | 1,687                           |       | — |   |
| Changes in  operating assets and liabilities:                                      |   |                            |       |   |   |
| Accounts  receivable, net                                                          |   | (2,527                          | )          | 8,353 |   |
| Other  receivables, net                                                            |   | 163                             |       | 1,061 |   |
| Inventories, net                                                                   |   | 3,158                           |       | 4,489 |   |
| Other assets                                                                       |   | (164                            | )          | 781 |   |
| Accounts payable                                                                   |   | (637                            | )          | (1,102 | ) |
| Accrued wages  and commissions                                                     |   | (2,228                          | )          | 230 |   |
| Accrued  liabilities                                                               |   | (1,151                          | )          | (4,111 | ) |
| Income taxes,  current and deferred                                                |   | 2,226                           |       | (1,275 | ) |
| Net cash  provided by operating activities                                         |   | 18,670                          |       | 21,045 |   |
|                                                                               |   |                            | ** ** |   | ** ** |
| Cash flows from  investing activities:                                             |   |                            |       |   |   |
| Purchases of  property and equipment                                               |   | (802                            | )          | (1,596 | ) |
| Purchases of  investments                                                          |   | (45,111                         | )          | (58,416 | ) |
| Maturities of  investments                                                         |   | 33,352                          |       | 11,321 |   |
| Proceeds from  sales of investments                                                |   | —                          |       | 305 |   |
| Net cash used in  investing activities                                             |   | (12,561                         | )          | (48,386 | ) |
|                                                                               |   |                            | ** ** |   | ** ** |
| Cash flows from  financing activities:                                             |   |                            | ** ** |   | ** ** |
| Proceeds from  issuance of common stock                                            |   | 7,266                           |       | 1,794 |   |
| Net cash  provided by financing activities                                         |   | 7,266                           |       | 1,794 |   |
|                                                                               |   |                            |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |   | 18                              |       | (4 | ) |
|                                                                               |   |                            |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | 13,393                          |       | (25,551 | ) |
| Cash and cash  equivalents at beginning of period                                  |   | 61,699                          |       | 80,506 |   |
| Cash and cash  equivalents at end of period                                        |   | $                               | 75,092     |   | $ | 54,955 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basisof Presentation

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in conformitywith generally accepted accounting principles and reflect all adjustmentsconsisting of normal recurring adjustments which, in the opinion of management,are necessary for a fair presentation of the results for the periodsshown.  The results of operations forthese periods are not necessarily indicative of the results expected for thefull fiscal year or for any future periods. The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates and assumptions. Certain reclassifications have been made to the prior year financialstatements to conform to the current year presentation.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2002, which is on file with the Securities and Exchange Commission.

 

We report our annualresults based on years ending December 31. We report our quarterly results for the first three interim periodsbased on 13 week periods ending on Fridays and for the fourth interim periodending on December 31.

 

Our financial statementsare consolidated and include the accounts of Avocent Corporation and our whollyowned subsidiaries.  Significantinter-company transactions and balances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 
|             |   | **March 28,  2003** |   | **December  31,  2002** |   |
|------------------|--------|---------------------|--------|-------------------------|--------|
|             |   | **(unaudited)**     |   | **(audited)**           |   |
| Raw materials    |   | $                   | 6,307  |                    | $      | 7,560 |   |
| Work-in-process  |   | 1,061               |   | 851                     |   |
| Finished goods   |   | 13,896              |   | 16,011                  |   |
| Inventories, net |   | $                   | 21,264 |                    | $      | 24,422 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$8,076 and $7,502, as of March 28, 2003 and December 31, 2002, respectively.

 

Note 3.   StockOptions and Deferred Compensation

 

Deferred compensation —We recorded $41,165 of deferred compensation related to Cybex employee stockoptions at the time of the merger of Apex and Cybex on July 1, 2000.  Additionally, we recorded $2,752 of deferredcompensation related to the Equinox employee stock options at the time of theacquisition on January 3, 2001.  Thedeferred compensation is being amortized over the vesting period of the optionsfor which it was recorded.

 

Stock option exercises —Options to purchase 425 shares of our Common Stock were exercised during thequarter ended March 28, 2003.  Wereceived proceeds totaling $6,609 from these option exercises. Additionally, 51shares of our Common Stock were issued during the three months ending March 28,2003 under our Employee Stock Purchase Plan. We received proceeds totaling $657 from issuance these share issuances.

 

Note 4.   AccumulatedOther Comprehensive Income

 

We record unrealizedgains and losses on our foreign currency translation adjustments and unrealizedholding gains or losses on our available-for-sale securities as accumulatedother comprehensive income (loss), which is included as a separate component ofstockholders’ equity.  For the threemonths ended March 28, 2003 and March 29, 2002, total other

 

6

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comprehensive income amounted to $259 and $125,respectively.  As of March 28, 2003 andMarch 29, 2002, total accumulated other comprehensive income was $ 273 and $14,respectively.

 

Note 5.   EarningsPer Share

 
|                                                                 |   | **Income  (loss)  (Numerator)** |       | **Shares  (Denominator)** |       | **Per-Share  Amount** |       |
|----------------------------------------------------------------------|--------|---------------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                                                 |   |                            | ** ** |                      | ** ** |                  | ** ** |
| **For the three months ended March  28, 2003**                       |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders                         |   | $                               | 8,167      |                      | 45,413     |                  | $          | 0.18 |   |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   | —                          |       | 1,278                     |       | —                |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |   | $                               | 8,167      |                      | 46,691     |                  | $          | 0.17 |   |
|                                                                 |   |                            |       |                      |       |                  |       |
| **For the three months ended March  29, 2002**                       |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders                         |   | $                               | 303        |                      | 44,828     |                  | $          | 0.01 |   |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   | —                          |       | 870                       |       | —                |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |   | $                               | 303        |                      | 45,698     |                  | $          | 0.01 |   |

 

Note 6.   Salesby Geographic Region

 

We report operations as asingle operating segment; however, we report sales by geographic region.  Following is a presentation of sales bygeographic region for the periods ended March 28, 2003 and March 29, 2002:

 
|               |   | **For the  three months ended** |       |
|--------------------|--------|---------------------------------|------------|
|               |   | **March 28,  2003**             |       | **March 29,  2002** |   |
|               |   | **(unaudited)**                 |       | **(unaudited)** |   |
| Net sales:         |   |                            | ** ** |   | ** ** |
| United States      |   | $                               | 42,321     |   | $ | 37,346 |   |
| Rest of the  World |   | 28,841                          |       | 24,757 |   |
|               |   | $                               | 71,162     |   | $ | 62,103 |   |

 

Asof March 28, 2003, long-lived assets totaled $275,542, which includes $273,899held in the U.S. and $1,643 held outside of the U.S.  As of December 31, 2002, long-lived assets totaled $282,262,which includes $280,423 held in the U.S. and $2,305 held outside of the U.S.

 

Note7.   Forward Contracts

 

We use forward contracts to reduce our foreigncurrency exposure related to the net cash flows from our internationaloperations. The majority of these contracts are short-term contracts (threemonths or less) and are marked-to-market each quarter and included in tradepayables, with the offsetting gain or loss included in other revenues in theaccompanying statements of operations. At March 28, 2003, we had a liabilityrelated to two open forward contracts, both maturing in the second quarter of2003, with a fair value at March 28, 2003 of approximately $157.

 

7

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Note8.   Goodwill and Other Intangible Assets

 

Acquired other intangible assets subject toamortization were as follows:

 
|                             |   | **March 28,  2003**          |    | **December  31, 2002**        |   |
|----------------------------------|--------|------------------------------|---------|-------------------------------|--------|
|                             |   | **Gross  Carrying  Amounts** |    | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
| Developed  technology            |   | $                            | 65,740  |                          | $      | 36,105 |   | $ | 65,740 |   | $ | 32,869 |   |
| Patents and  trademarks          |   | 17,482                       |    | 6,635                         |   | 17,350 |   | 5,663 |   |
| Customer base  and certification |   | 21,113                       |    | 17,772                        |   | 21,113 |   | 16,013 |   |
| Non-compete  agreements          |   | 3,273                        |    | 636                           |   | 3,273 |   | 364 |   |
| Other                            |   | 101                          |    | 76                            |   | 101 |   | 67 |   |
|                             |   | $                            | 107,709 |                          | $      | 61,224 |   | $ | 107,577 |   | $ | 54,976 |   |

 

For the three months ended March 28, 2003 and March29, 2002, amortization expense for other intangible assets was $6.2 million and$5.3 million, respectively.  Theapproximate estimated annual amortization for other intangibles is as follows:

 

| **Years ending December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2003                          |   | $      | 21,200 |   |
| 2004                          |   | $      | 17,300 |   |
| 2005                          |   | $      | 10,500 |   |
| 2006                          |   | $      | 2,100  |   |
| 2007                          |   | $      | 1,500  |   |

 

In accordance with Statement of Financial AccountingStandards No. 142, *Goodwill and Other Intangible Assets*, we will test goodwill at least annually forimpairment.  Unless conditions warrantearlier review, we perform the annual impairment test in the fourth quarter ofeach year.

 

Therewere no additions or deletions to the carrying amount of goodwill for the threemonths ended March 28, 2003.

 

Note9.   Shannon Building Purchase

 

In May 2003, AvocentCorporation’s wholly-owned subsidiary, Avocent International Ltd, signed acontract to purchase a 129,000 square foot facility in Shannon, Ireland, for5,350 euros plus stamp duty (approximately $6,400 in total) from TellabsLimited. The new facility and the currently leased space are both located inthe Shannon Free Trade Zone.  InFebruary 2003, we gave notice of our intent to terminate our current lease upontransfer of our European headquarters and manufacturing operations to the newfacility, which is expected to occur in the summer of 2003. We paid a leasetermination penalty of  $514 uponnotification to the landlord of our intention to cancel the lease. This paymentwas expensed in the first quarter of 2003. We expect to occupy the new purchased facility in the third quarter ofthis year.

 

Note 10. Patent Dispute

 

In May 2001, AvocentRedmond Corp. (formerly Apex Inc.), our wholly-owned subsidiary, filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree Apex patents.  After a seven daybench trial in New York in January 2002, U.S. District Judge Milton Pollack found that there was no infringement ofthree patents by Raritan and ordered that judgment be entered in favor ofRaritan.

 

In April 2003, the UnitedStates Court of Appeals for the Federal Circuit issued its ruling in the patentlitigation between Avocent Redmond Corp. and Raritan Computer Inc.  The Court of Appeals ruled in favor ofAvocent Redmond Corp. by vacating the non-infringement decision of the DistrictCourt for the Southern District of New York and remanding the case for furtherproceedings consistent with the Court of Appeals’ opinion.

 

8

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Note 11.  Stock Based Compensation

 

We apply AccountingPrinciples Board Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations in accounting for our stock plans. Had compensationcost for our stock-based compensation plans been determined based on the fairvalue at the grant dates for awards under those plans consistent with themethod prescribed in SFAS No. 123, *Accounting for Stock-Based Compensation*,our  net income and earnings per sharewould have been reduced to the pro forma amounts indicated below:

 
|                                                                                                                                    |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net income  — as reported                                                                                                     |   | $        | 8,167  |     | $      | 303 |   |
| Add: Stock-based  employee compensation expense included in reported net income (loss), net of  related tax effects                     |   | 1,501    |   | 4,583    |   |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |   | 7,524    |   | 10,553   |   |
| Net income  (loss) — pro forma                                                                                                     |   | $        | 2,144  |     | $      | (5,667 | ) |
|                                                                                                                                    |   |     |   |     |   |
| Basic earnings  per share — as reported                                                                                            |   | $        | 0.18   |     | $      | 0.01 |   |
| Basic loss per  share — pro forma                                                                                                  |   | $        | 0.05   |     | $      | (0.13 | ) |
| Diluted earnings  per share — as reported                                                                                          |   | $        | 0.17   |     | $      | 0.01 |   |
| Diluted loss per  share — pro forma                                                                                                |   | $        | 0.05   |     | $      | (0.13 | ) |

 

The pro forma amountsreflected above are not representative of the effects on reported net income infuture years because, in general, the options granted typically do not vest forseveral years and additional awards are made each year. The fair value of eachoption grant is estimated on the grant date using the Black-Scholesoption-pricing model using the following weighted-average assumptions:

 
|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Dividend yield           |   | 0.0      | %      | 0.0      | %      |
| Expected life  (years)   |   | 5        |   | 5        |   |
| Expected  volatility     |   | 67.5     | %      | 67.5     | %      |
| Risk-free  interest rate |   | 2.55     | %      | 4.47     | %      |

 

Note 12.  Recently Issued Accounting Standards

 

InJuly 2002, the Financial Accounting Standards Board issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal*, which is effective fordisposal or exit activities that are initiated after December 31, 2002. Weadopted this statement effective January 1, 2003.  This statement addresses financial accounting and reporting forcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*. The statement requires that a liability for a cost associated with anexit or disposal activity shall be recognized and measured initially at itsfair value in the period in which liability is incurred, except for liabilitiesfor one-time termination benefits that are accrued over time.  In the unusual circumstance in which fairvalue cannot be reasonably estimated, the liability shall be recognizedinitially in the period in which fair value can be reasonably estimated.  The impact of SFAS No. 146 was not materialto our financial statements.

 

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Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

*THE INFORMATION IN THIS ITEM 2 “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS” CONTAINS FORWARD-LOOKINGSTATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTUREBUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL, STATEMENTS REGARDING OURENGINEERING AND DESIGN ACTIVITIES, PRODUCT DEVELOPMENT, AND NEW PRODUCTINTRODUCTIONS, STATEMENTS RELATING TO FUTURE PRODUCT DEMAND AND OUR FUTURESALES, EARNINGS, GROSS PROFIT, INCOME, AND EXPENSES, STATEMENTS REGARDINGINTERNATIONAL SALES, STATEMENTS REGARDING MERGER ACCOUNTING, ACQUISITION, ANDTRANSACTION COSTS AND ADJUSTMENTS, STATEMENTS ABOUT THE RATIO OF SALES AMONGOUR DISTRIBUTION CHANNELS, STATEMENTS REGARDING FUTURE INVENTORY LEVELS,STATEMENTS ABOUT THE TIMING, IMPLEMENTATION, AND BENEFITS OF OUR NEW ERP SYSTEMAND THE PURCHASE OF OUR NEW FACILITY IN SHANNON, IRELAND, AND STATEMENTSRELATING TO ANTICIPATED CAPITAL NEEDS AND USES.*

 

*THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TOCERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THE RISKS ASSOCIATED WITH GENERAL ECONOMICCONDITIONS, RISKS ATTRIBUTABLE TO FUTURE PRODUCT DEMAND, SALES, AND EXPENSES,RISKS ASSOCIATED WITH PRODUCT DESIGN EFFORTS, RISKS ASSOCIATED WITH RELIANCE ONA LIMITED NUMBER OF COMPONENT SUPPLIERS AND SINGLE SOURCE COMPONENTS, THE LOSSOF ONE OF OUR OEM CUSTOMERS, A REDUCTION OR FLUCTUATIONS IN SALES OF OUR OEM ORBRANDED PRODUCTS, INTENSE COMPETITION AND NEW PRODUCTS AND TECHNOLOGIES FROMEXISTING AND NEW COMPETITORS, RISKS RELATED TO PROTECTING OUR INTELLECTUALPROPERTY RIGHTS, FLUCTUATIONS IN FOREIGN CURRENCIES, RISKS RELATED TO MERGERINTEGRATION, AND OTHER RISKS DETAILED IN OUR ANNUAL REPORT ON FORM 10-K, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGECOMMISSION ON MARCH 27, 2003.*

 

**Overview**

 

We design, manufacture, and sellanalog and digital KVM (keyboard, video and mouse) switching systems, serialconnectivity devices, extension and remote access products, technologies,software, and display products for the computer industry. Data center managersand network administrators have increasingly complex and growing serverpopulations, and our analog, digital, and serial switching solutions, as wellas our extension and remote access products, technologies, and software, helpthem manage multiple servers and serially controlled devices from a singlelocal or remote console consisting of a keyboard, video monitor, andmouse.  Specifically, our products canprovide significant cost reductions including lower initial investment, reducedutility costs, and space savings, as well as more efficient technical supportcapabilities.

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms. Ourswitching solutions include products, technologies and software sold orlicensed under the Avocent, Apex, Cybex, Equinox, and 2C brands, including our *AMXTM*, *AutoViewTM,DS SeriesTM, OutLook®, and XP®4000 Series* products. Our switchingsystems and solutions help facilities managers and network administratorsaccess multiple servers and serially controlled devices from one or morecentralized or remote consoles, consolidate hardware requirements, and providedirect hardwired connections between the switch and the attached servers tofacilitate access to those servers, even when the network is down. OurEquinox branded products add high-performance, reliable, and affordableserver-based products for serial and dial-up access applications.  The Equinox *SuperSerialTM* product line provides serial communications forsecurity, commercial point-of-sale, process control, industrial automation,data collection, remote access, fax servers, Internet access, and customapplications. Our 2C product line includes the *CstationTM* product. Initial applications for Cstation include financial trading floors wherespace is at a premium, industrial plant control environments that benefit fromremote computers due to harsh or unsecured environments, and governmentinstallations that require high security afforded through the remote locationof the computer and hard disk.

 

A substantial portion of our revenue is derived fromsales to a limited number of OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. For the quarter ended March 28, 2003, salesto our OEM customers were 47% of net sales, sales to our reseller anddistributor network were 51% of net sales, and sales to our direct customerswere 2% of net sales. We do not have contracts with many of these customers,and in general, they are obligated to purchase products from us only pursuantto binding purchase orders.  The lossof, or material decline in orders from, our OEM customers would have a materialadverse effect on our business, financial condition, results of operation, andcash flow.  Our top five customers, whoinclude OEMs and distributors, accounted for 62.6% of our sales for the quarterended March 28, 2003.

 

We sell our products in the United States, Canada,Europe and Asia as well as in other foreign markets.  Sales within the

 

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United States accounted for approximately 59.5% of sales in the quarterended March 28, 2003, while sales outside of the United States accounted for40.5% of sales in the quarter ended March 28, 2003.

 

With recent industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are, generally, to reduce the number of weeks offorward-committed firm orders. This trend is currently affecting our businesswith certain distributors, OEMs and other server manufacturers, and we believethat it will make our future sales more difficult to predict and inventorylevels more difficult to manage.

 

We are currently experiencingincreased price competition in the market for all of our products, and weexpect that pricing pressures will continue to increase in the future.  In addition, general economicconditions are not as favorable as they were in prior years, and our revenuegrowth rate has slowed.  Depending onfuture general economic conditions and other factors, our revenue could declinein the future.

 

We received ISO 9000:2000accreditation for our global business processes during the first quarter of2003.  We believe ISO accreditation willbecome a requirement for doing business with several of our OEM customers.

 

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and continue to vest in additional shares on aregular basis.  These officers anddirectors have informed us that they have sold and may sell additional sharesof our common stock to provide personal liquidity and diversify theirportfolios.

 

During 2003 we commencedimplementation of a new enterprise resource planning system which we expect tohave fully operational in 2004. We have capitalized costs related to the ERPproject of over $1.6 million through March 28, 2003.  We expect the total cost of implementing the system to be in therange of $11.0 million to $12.2 million. We expect the new system will provide many benefits, including more detailedinformation to improve the ways we manage inventory, customer relationships andoperating expenses on more a timely basis. The implementation of the new system involves a number of risks, asdetailed in our Risk Factors contained in our Form 10-K for December 31, 2002.

 

**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, selected statement ofoperations data expressed as a percentage of net sales:

 
|                                                  |   | **Three  Months Ended** |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | **March 28,  2003**     |   | **March 29,  2002** |   |
| Net sales                                             |   | 100.0                   | %      | 100.0 | % |
| Cost of sales                                         |   | 44.4                    |   | 51.3 |   |
| Gross profit                                          |   | 55.6                    |   | 48.7 |   |
| Operating expenses:                                   |   |                    |   |   |   |
| Research and development expenses                     |   | 9.6                     |   | 10.4 |   |
| Selling, general and administrative expenses          |   | 23.4                    |   | 32.0 |   |
| Amortization of intangible assets                     |   | 8.6                     |   | 8.5 |   |
| Total operating expenses                              |   | 41.6                    |   | 50.9 |   |
|                                                  |   |                    |   |   |   |
| Income (loss) from operations                         |   | 14.0                    |   | (2.2 | ) |
|                                                  |   |                    |   |   |   |
| Net investment  income                                |   | 1.7                     |   | 2.2 |   |
| Net realized  investment losses                       |   | (0.1                    | )      | (0.1 | ) |
| Other income  (expense), net                          |   | (0.4                    | )      | 0.1 |   |
|                                                  |   |                    |   |   |   |
| Loss before provision for (benefit from) income taxes |   | 15.2                    |   | (0.0 | ) |
|                                                  |   |                    |   |   |   |
| Provision for (benefit from) income taxes             |   | 3.7                     |   | (0.5 | ) |
|                                                  |   |                    |   |   |   |
| Net income                                            |   | 11.5                    | %      | 0.5 | % |

 

*Net sales.*  Net sales increased 15% to $71.2 million forthe first quarter of 2003 from $62.1 million for the first quarter of2002.  The increase in sales resultedprimarily from the strength of our OEM and our reseller and distributorchannels in the first quarter of 2003 as compared to the first quarter of 2002.  Both the reseller and distributor channeland the OEM channel benefited

 

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from revenue from new products introduced during thesecond half of 2002. The new products include the AMX and the AVR and OEMversions of our digital product family. These new products accounted for more than $12.5 million of firstquarter 2003 sales.  Sequentially, oursales increased approximately $200,000 from the fourth quarter of 2002.  The sequential increase in sales was due tostrength in our branded U.S. sales, which helped offset lower overall OEMsales.   Our OEM sales declined 6% fromthe fourth quarter of 2002.  Thisdecline in OEM sales compares favorably to the 9% sequential decline from thefourth quarter of 2001 to the first quarter of 2002.  We attribute most of this improvement to the continued ramp up insales of our digital products through the OEM channel.  The sequential decline from the fourthquarter of 2002 to the first quarter of 2003 in OEM sales was offset by animprovement in our reseller and distributor business, which increasedapproximately 9% from the fourth quarter of 2002. Sales through our reseller and distributor channel increased 10% from$32.8 million in the first quarter of 2002 to $36.1 million in the firstquarter of 2003. Direct sales increased 29% from $1.5 million in the firstquarter of 2002 to $1.8 million in the first quarter of 2003. OEM salesincreased 19% from $27.8 million in the first quarter of 2002 to $33.2 millionin the first quarter of 2003. Reseller and distributor sales were 51% of salesfor the first quarter of 2003, compared to 53% of sales for the first quarterof 2002.  OEM sales were 47% of salesfor the first quarter of 2003, compared to 45% of sales for the first quarterof 2002.  Direct sales were 2% of salesfor the first quarter of 2003 and 2002.

 

Weexperienced an increase in sales both within the United States andinternationally. Sales within the United States increased 13% to 42.3 millionin the first quarter of 2003 from $37.3 million in the first quarter of2002.  International sales increased 16%to $28.9 million in the first quarter of 2003 from $24.8 million in the firstquarter of 2002.  Sales within theUnited States were 60% of sales for the first quarter of both 2003 and 2002,and international sales were 40% of sales for the first quarter of both 2003and 2002.

 

*Gross profit.*Gross profit may be affected by a variety offactors, including: the ratio of sales among our distribution channels, as OEMsales typically have lower gross margins than our reseller and distributorsales and direct sales; absorption of fixed costs as sales levels fluctuate;product mix, raw materials, and labor costs; new product introductions by usand by our competitors; and the level of our outsourcing of manufacturing and assemblyservices.  Gross profit increased to 55.6% in the first quarter 2003 ascompared to 48.7% in the first quarter of 2003.  The primary reasons for strong margins in 2003 were cost reductionsand favorable customer and product mix. Our costs declined in the first quarter of 2003 primarily due toimproved pricing from our vendors and the cessation of the West Coast portlabor dispute.  Our U.S. branded saleswere up significantly from last year and these sales carry a higher grossmargin than our OEM and international sales. Our digital family of products has higher gross margins than our otherproducts and accounted for 33% of total sales for the first quarter of 2003,compared to 19% of sales for the first quarter of 2002.  In future quarters we expect gross margin toreturn to the 52% to 54% range as OEM and international sales increase as apercentage of our sales mix.

 

*Research and development expenses.*  Researchand development expenses include compensation for engineers, support personnel,outside contracted services and materials costs, and are expensed as they areincurred.  Research anddevelopment expenses were $6.8 million, or 9.6% of net sales, in the firstquarter of 2003 compared to $6.4 million, or 10.4% of net sales, for the firstquarter of 2002.  The increase in theamount spent on research and development can be attributed to an increase inheadcount, primarily as a result of the 2C purchase in the third quarter of2002, and an increase in materials, certification, and testing of productscurrently in development. We believethat the timely development of innovative products and enhancements to existingproducts is essential to maintaining our competitive position.  We expect research and developmentexpenditures to be at the same level in the second quarter of 2003 as in thefirst quarter of 2003.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, information systems, humanresources, sales and marketing and general management, as well as some mergerand acquisition related expenses, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses andrelated travel costs.  Selling,general and administrative expenses were $16.7 million, or 23.4% of net sales,for the first quarter of 2003 compared to $19.9 million, or 32.0% of net sales,for the first quarter of 2002.  Thedecrease in selling, general and administrative expenses was affected by our decision to expense $2.7 million in legal feesduring the first quarter of 2002. Approximately $1.8 million of these fees were deferred from previousperiods and $900 thousand of fees were incurred during the first quarter of2002. These fees related to the patent infringement lawsuit we brought againstone of our competitors challenging the use of on-screen technology in thecompetitor’s switches.  A court decisionwas reached in February 2002 that found no infringement of the three patentsinvolved in the lawsuit.  The judgmentwas vacated by the United States Court Appeals in April 2003 and remanded backto the district court.  We intend tocontinue to vigorously pursue the lawsuit. Nevertheless, we continue to expense these legal fees due to the uncertaintyof the litigation.  In addition, werecorded $2.0 million of compensation expense in the first quarter of 2002 asthe result of a cashless option exercise. We allowed shares issued upon the exercise of certain options by aformer executive to be traded as payment for the cost of these options and therelated taxes.  Under applicableaccounting rules, this cashless exercise required variable plan accounting forthese options.  The reduction inselling, general and administrative expenses was partially offset by a $514,000lease cancellation fee we paid and expensed in the first quarter of 2003related to the purchase of a new facility in Shannon, Ireland.  We expect selling, general andadministrative expenditures to decline slightly in the second quarter of 2003from the level we experienced in the first quarter of 2003.

 

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*Amortization of intangible assets*. Amortization of $6.2 million in 2003 is comprised of the amortization ofthe identifiable intangible assets created as a result of the mergertransaction between Apex and Cybex and the acquisitions of Equinox and 2C,while amortization of $5.3 million in 2002 includes the amortization of theidentifiable intangible assets created as a result of the merger transactionbetween Apex and Cybex and the acquisition of Equinox.  The increase in amortization expense relatesprimarily to the additional expense for intangible assets recorded at theacquisition of 2C.

 

*Net investment income**.** *Net******investment income decreased to $1.2 millionin the first quarter of 2003 from $1.4 million in the first quarter of2002.  Althoughwe had more cash and investments in 2003 than in 2002, interest income hasdeclined due to lower interest rates**.**

 

*Net realized investment losses. *Net realized investmentlosses remained relatively flat from $75,000 in the first quarter of 2002 to$87,000 in first quarter of 2003.

 

*Other income(expense), net.*  Net other income (expense) decreased fromincome of $53,000 in the first quarter of 2002, to expense of $305,000 in thefirst quarter of 2003. The decline related primarily to foreign exchange lossesof $294,000 recorded in the first quarter of 2003 as compared to gains ofapproximately $60,000 recorded in the first quarter of 2002. This declinerelates primarily to the change in the exchange rate of the dollar versus theeuro.

 

*Provision for(benefit from) income taxes.*  The provision for income taxes wasapproximately $2.6 million for the first quarter of 2003, compared to abenefit from income taxes of $333,000 in the first quarter of 2002.  The change in taxes resulted from the impactof merger related expenses on lower sales volume and taxable income in thefirst quarter of 2002 as compared to higher sales volume and higher taxableincome in 2003. Also affecting our tax rate was the mix of our pre-tax profitamong our U.S. and international companies.

 

*Net income(loss).*  Net income for the first quarter of 2003 was$8.2 million compared to $303,000 for the first quarter of 2002, as a result ofthe above factors, including the increase in our revenues and our margins, aswell as a reduction in selling, general and administrative charges.  Net income as a percentage of sales for thefirst quarter of 2003 was 11.5%, compared to 0.5% for the first quarter of2002.

 

**Liquidity andCapital Resources**

 

Asof March 28, 2003, our principal sources of liquidity consisted of over $238million in cash, cash equivalents, and investments.  We have no outstanding debt or available credit facilities as ofthis filing.

 

Ouroperating activities generated cash of over $18 million in the first threemonths of 2003, compared to approximately $21 million in the first three monthsof 2002.  The continued strong cash flow from operations in the first quarter of2003 is primarily the result of increased net income and our continued focus onmanaging our receivables and inventory that has carried over from 2002.  Inventories declined from $24.4 million atDecember 31, 2002 to $21.3 million at March 28, 2003.  The decline in inventory was the result of the continued effortsof our operations group, at all of our locations, to increase turnover byconsuming existing supplies while maintaining adequate inventory to meetcustomer demands.  Inventories were alsoaffected by increases to our reserves and valuation accounts.  We anticipate that inventories will trenddownward slightly during 2003. Additionally, we recorded a tax benefit from the exercise of stockoptions of over $1.6 million in the first quarter of 2003.  We experienced significant exercises ofstock options in the first quarter of 2003 as our stock achieved new 52-weekhighs in February and March of 2003.  Anincrease in receivables partially offset the impact of the decline in inventoryand the tax benefit from options.  Theincrease in receivables was a result of the timing and volume of sales in thefirst quarter of 2003.  A decline inaccrued compensation also affected cash flow from operations for the firstquarter of 2003.  Overall, our annualemployee bonuses were larger for 2002 than for 2001 and we paid these bonusesto our employees shortly after year-end in efforts to tie the reward to theimproved results of 2002.

 

InFebruary 2003 we agreed in principle, and in May 2003, we signed a definitivecontract to purchase a facility in Shannon, Ireland for approximately 6.0million euros to replace our currently leased space in Shannon.  We expect to occupy and transfer ouroperations to the new facility in the summer of 2003.  We purchased a currency forward to hedge the purchase price atapproximately $6.4 million. Additionally, in February 2003 we paid an early cancellation fee ofapproximately $514,000 to the owner of our current leased facility, which we recognizedas an expense in the first quarter of 2003.

 

Weintend to use a portion of our cash and investments for strategic acquisitionsof technologies and companies that will enhance and complement our existingtechnologies and help increase our sales.

 

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**Investments**

 

Our investments consistof corporate bonds, commercial paper, mortgage backed securities guaranteed byU.S. government agencies, and common stock. Debt securities that we have thepositive intent and ability to hold to maturity are classified asheld-to-maturity securities and are reported at amortized cost. Debt and equitysecurities not classified as held-to-maturity securities and that have readilydeterminable fair values are classified as available-for-sale securities andare reported at fair value, with unrealized gains and losses excluded fromearnings and reported as a separate component of stockholders’ equity. Weperiodically review our investment portfolio for investments considered to havesustained an other-than-temporary decline in value.   Upon review of our investment portfolio as of March 28, 2003, noinvestment was considered to have sustained an other-than-temporary decline,and no charge was recorded.

 

**CriticalAccounting Policies**

 

We believe the following critical accounting policiesaffect the more significant judgments and estimates used in the preparation ofour consolidated financial statements:

 

•              We review customer contracts todetermine if all of the requirements for revenue recognition have been metprior to recording revenues from sales transactions.  We generally record sales revenue upon shipment of our products,net of any discounts, since we generally do not have significant post deliveryobligations, the product price is fixed and determinable, collection of theresulting receivable is probable, and product returns are reasonablyestimable.  We generally ship productsupon receipt of a purchase order from a customer.  We record revenue in accordance with the applicable terms of eachrespective customer contract. Accordingly, revenue on products shipped FOB destination is recordedwhen the customer takes possession of the goods, and revenue on productsshipped FOB shipping point is recorded when the goods leave ourfacilities.  Shipping and handling feesare included in net sales, and the related costs are included in cost of salesin the accompanying consolidated statements of operations

 

We accrue for sales returns as a reduction of salesand cost of sales based on our experience from historical customer returns,which we believe provides a reasonable estimate of future returns.  Our sales agreements generally include aone-month unconditional return policy. We also allow additional rights of return to certain distributors, whichgenerally extend the return period to 90 days. If actual future customer returns are less favorable than thoseprojected by management, additional sales return costs may be incurred.  The reserve is included as a reduction inthe carrying value of accounts receivable in the accompanying consolidatedbalance sheets.

 

Prior to extending credit to a new customer, weperform a detailed credit review of the customer and establish credit limitsbased on the results of our credit review. We review collection experience periodically to determine if thecustomer’s payment terms and credit limits need to be revised.  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.  If circumstances change with regard toindividual receivable balances that had previously been determined to beuncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.

 

•              We carry our inventory at thelower of cost or market, with cost being determined using the first-in,first-out method.  We use standard costsfor material, labor, and manufacturing overhead to value our inventory.  We review and revise our standard costs on aquarterly basis.  Therefore, our inventorycosts approximate actual costs at the end of each reporting period.  Wewrite down our inventory for estimated obsolescence or unmarketable inventoryto the estimated market value based upon assumptions about future demand andmarket conditions.  If actual futuredemand or market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required.

 

•              We provide for the estimated costof product warranties at the time revenue is recognized.  While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating thequality of our component suppliers and contract manufacturers, our warrantyobligation is affected by product failure rates, failure rates of purchasedcomponents integrated into our products, material usage, and other rework costsincurred in correcting a product failure. Should actual product failure rates, material usage, or other reworkcosts differ from our estimates, revisions to our estimated warranty liabilitymay be required.

 

•              We hold investments in variouspublicly traded equity and debt securities, including mortgaged-backed andother asset-backed securities.  Werecord an investment impairment charge when we believe an investment has

 

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experienced a decline in value that is other thantemporary.  Future adverse changes inmarket conditions or poor operating results of underlying investments couldresult in losses or an inability to recover the carrying value of theinvestments that may not be reflected in an investment’s current carryingvalue, thereby possibly requiring an impairment charge in the future.

 

                Wealso invest in privately held entities and generally record our investments inthese entities at cost or we use the equity method if we have the ability toexercise significant influence over the entity.  We review our investments in these entities periodically todetermine if circumstances (both financial and non-financial) exist thatindicate that we will not recover our initial investment.  We record impairment charges on investmentshaving a carrying value that is greater than the value that we would reasonablyexpect to receive in an arm’s length sale of the investment.

 

•              During the first quarter of 2003we began implementing a new ERP system. In accordance with SOP 98-1, "Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use," we will capitalize thedirect costs incurred during the application development stage of theimplementation.  The costs capitalizedto date for the new system totaled $1.6 million as of March 28, 2003.

 

**Item3.****Quantitative and QualitativeDisclosures About Market Risks.**

 

Ourprimary market risk is the potential loss arising from increases in interestrates, which could have an adverse impact on the fair value of our investmentsecurities. Our investment policy is to manage our investment portfolio topreserve principal and liquidity while maximizing the return on our investmentportfolio through the investment of available funds. We diversify our investmentportfolio by investing in a variety of highly-rated investment-grade securitiesand through the use of different investment managers. Our investment securitiesportfolio is primarily invested in securities with maturities (or interest rateresets) of two years or less with at least an investment grade rating tominimize interest rate and credit risk as well as to provide for an immediatesource of funds. Market risk, calculated as the potential change in fair valuein our investment portfolio resulting from a hypothetical 10% change ininterest rates, was not material at March 28, 2003. We generally holdinvestment securities until maturity.

 

Weare also exposed to equity price risks on our investments in publicly tradedequity securities. These investments are generally in companies havingoperations or technology in areas within our strategic focus. We do not attemptto reduce or eliminate our market exposure on these securities. As of March 28,2003, the fair value of our equity investments was $996,000. A 20% adversechange in equity prices would result in a decrease of approximately $199,000 inthe fair value of our equity securities as of March 28, 2003.

 

Wealso face foreign currency exchange rate risk to the extent that the value ofcertain foreign currencies relative to the U.S. dollar affects our financialresults.  Our international operationstransact a portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenues, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of foreign currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies. At March 28, 2003, we had twoopen forward contracts, both maturing in the second quarter of 2003, with afair value at March 28, 2003 of approximately $157,000.

 

**Item4.****Controls and Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of a datewithin 90 days of the filing date of this Quarterly Report on Form 10-Q, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934) are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

 

(b) *Changes in internal controls*.    There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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### **PART II — OTHER INFORMATION**

 

**Item1.    Legal Proceedings.**

 

In May 2001, AvocentRedmond Corp. (formerly Apex Inc.), our wholly-owned subsidiary, filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree Apex patents.  After a seven daybench trial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of three patents by Raritan and ordered thatjudgment be entered in favor of Raritan.

 

In April 2003, the UnitedStates Court of Appeals for the Federal Circuit issued its ruling in the patentlitigation between Avocent Redmond Corp. and Raritan Computer Inc.  The Court of Appeals ruled in favor of AvocentRedmond Corp. by vacating the non-infringement decision of the District Courtfor the Southern District of New York and remanding the case for furtherproceedings consistent with the Court of Appeals’ opinion.

 

**Item 6.    Exhibits and Reports on Form 8-K.**

 

(a) Exhibits

 
|   | 10.38  |   | Purchase contract for facility in Shannon, Ireland,  by and among Avocent International Limited and Tellabs Limited. |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                 |
|   | 99.4   |   | Certification of Chief  Executive Officer and Chief Financial Officer                                                |

 

(b) Reports onForm 8-K

 

On January 30, 2003, we filed a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing the financial results forour fourth quarter and year ended December 31, 2002.

 

ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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### **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |        | AVOCENT CORPORATION.                                |   |
|--------|-------------|-----------------------------------------------------|--------|
|   |        | (Registrant)                                        |
|   |        |                                                |
|   |        |                                                |
| Date:  | May 9, 2003 | /s/ Douglas E. Pritchett                            |   |
|   |        | Douglas E. Pritchett                                |
|   |        | Senior Vice President of Finance, Chief Financial   |
|   |        | Officer and Treasurer (Principal Financial Officer) |

 

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**Sarbanes-OxleyAct of 2002 Section 302(a) Certification of Chief Executive Officer**

 

I, John R. Cooper, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Avocent Corporation;                                                                                                                                                                                                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 2.     | Based on my knowledge, this quarterly report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this quarterly report;                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                           | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                           | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                           | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 5.     | The registrant’s other certifying officers and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent functions):                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                           | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                           | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this quarterly report whether there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 
| Date: May 9, 2003 |                                  |
|-------------------|---------------------------------------|
|              |                                  |
|              |                                  |
|              | /s/ John R. Cooper                    |   |
|              | John R. Cooper                        |
|              | President and Chief Executive Officer |

 

18

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**Sarbanes-OxleyAct of 2002 Section 302(a) Certification of Chief Financial Officer**

 

I, Douglas E. Pritchett, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Avocent Corporation;                                                                                                                                                                                                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                           | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                           | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                           | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                           | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                           | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this quarterly report whether there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 
| Date: May 9, 2003 |                                                                                          |
|-------------------|-----------------------------------------------------------------------------------------------|
|              |                                                                                          |
|              | /s/ Douglas E. Pritchett                                                                      |   |
|              | Douglas E. Pritchett                                                                          |
|              | Senior Vice President of Finance, Chief Financial  Officer, Treasurer and Assistant Secretary |

 

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